Months-long vicious oil trading has turned into a nightmare for the global oil and gas industry, compelling many firms to contemplate consolidation as a means to reduce costs and restore profits. After a long wait, another major deal in the space came in yesterday with Anglo-Dutch oil and gas company Royal Dutch Shell entering into a deal to acquire a smaller British gas producer BG Group plc for about 47 billion pounds ($70 billion) in cash and stock.
This is the second deal in the broad energy space following the slump in oil prices that started last summer. The first merger deal was announced in November when Halliburton (HAL) proposed to acquire Baker Hughes (BHI) for $34.6 billion in cash and stock. It is expected to close in the second half of 2015.
Shell-BG Deal in Focus
Under the terms of the deal, Shell will pay 383 pence ($5.70) in cash and 0.4454 Shell B shares for each share of BG Group. This represents a massive 50% premium over the BG share price as of April 7. With this, BG shareholders would own 19% of the combined company. The deal marks the oil and gas industry’s mega-merger deal in more than a decade.
The proposed acquisition would further bolster Shell’s position in its two leading areas – liquefied natural gas and deepwater drilling. Additionally, it would expand and solidify the company’s presence in Brazil as the combined company is expected to boost production by tenfold to 550,000 barrels of oil and gas a day.
Further, the deal would boost Shell’s proven oil and gas reserves by 25% and total production by 20%, as the company will gain control over BG’s gas resources in East Africa, a large LNG gas project in Australia and the Santos Basin oil fields off the shore of Brazil. In terms of the financial aspect, the combined company will generate pre-tax synergies of approximately $2.5 billion per year until 2018.
The transaction, pending shareholder and regulatory approvals, is expected to close in the ongoing quarter. If approved, the combination would create the world’s largest independent producer of liquefied natural gas. Moreover, the combined entity would be big enough to surpass Chevron (CVX) and will fetch market value twice the size of BP plc (BP). Notably, with the BG acquisition, it seems that Shell will come much closer to the world’s largest publicly traded oil company, Exxon Mobil (XOM) challenging its dominance.
The Shell-BG deal seems to be paving way for more merger and acquisition activities in the industry, pushing big oils to consolidate once again. This is especially true as it reminds us of the situation back in 1998 when the slump in oil prices triggered a wave of deals following the first deal between BP plc and Amoco Corp.